Home loan affordability
worsened in September after house prices rose again to fresh
record highs in the last month before the Reserve Bank's new
speed limit on low deposit mortgages kicked in.

A surge of
housing market sales activity was evident before the October
1 start for the central bank's 10% limit on the growth of
new high Loan to Value Ratio mortgages (over 80%) as a
percentage of new mortgage flow. Sales activity was strong,
but new mortgage approvals were weak as buyers raced to use
their pre-approved mortgages before the October 1
deadline.

Mortgage brokers report new bank mortgage
approvals to those with a deposit of less than 20% of the
value of a home slowed sharply through the last two months
as banks adjusted to the late August announcement by the
Reserve Bank of its 'speed limit' to try to slow housing
inflation running at between 10% and 20% in Christchurch and
Auckland.

Three of the four big banks (ANZ, Westpac and
BNZ) have begun offering preferentially low interest rates
to borrowers with more than 20% equity and are imposing 'low
equity premiums' on borrowers with less than 20% equity.
Some are rejecting applications from those wanting to borrow
more than 80% and ASB withdrew its pre-approvals for
mortgages over 80%.

October is seen as the first key test
of how strong the housing market remains and whether the
Reserve Bank's measures are starting to have any
success.

"Borrowers and banks are adjusting to the new
environment, which is creating opportunities for some," said
Roost Mortgage Brokers spokeswoman Colleen Dennehy.
"Borrowers with more than 20% equity are in a much stronger
position to negotiate with the help of a broker," Dennehy
said.

"One size has never fitted all, but that is even
more true now," she said.

The Roost Home Loan
Affordability reports show national affordability worsened
to 57.5% in September from 56% in August after the national
median house price rose to NZ$400,000 from NZ$390,000 in
August. The reports show improvements in 8 regions and
deteriorations in 16 regions, largely due to movements in
house prices in those areas. The reports measure the
percentage of after tax pay needed to service an 80%
mortgage on a median priced house.

The Roost Home Loan
Affordability report for September showed affordability for
regular home buyers improved in Tauranga, New Plymouth,
Napier, Nelson, Hutt Valley, Porirua and Palmerston North,
but worsened across all parts of Auckland, Hamilton,
Whangarei, Wanganui and everywhere in the South Island south
of Nelson.

It was toughest for first home buyers in
Auckland. It took 89.2% of a single median after tax income
to afford a first quartile priced house in South Auckland in
September, while it took 100.7% in the North
Shore.

Affordability on the North Shore was at its worst
level in more than 3 years.

Nationally, affordability for
someone on a single median income worsened by 1.5% in
September from August, which meant it took 57.5% of after
tax income to afford an 80% mortgage on a median house,
according to the Roost home loan affordability
report released today.

Average fixed mortgage
rates, which more than 50% of new borrowers now use, fell
slightly in September for those with more than 20% equity
and after-tax wages rose just over NZ$1 per week to NZ$809
per week. Interest rates rose for those borrowing more than
80% of the value of the home.

Housing affordability has
become a major economic and political issue over the last
year. The Reserve Bank and Government agreed on a toolkit of
'macro-prudential' controls in May that would see the
central bank impose limits growth in high loan to value
ratio mortgages. Central and local governments are also
moving to address housing supply shortages.

For first
home buyers – which in this Roost index
are defined as a 25-29 year old who buys a first quartile
home – there was also a deterioration in affordability in
most cities.

It took 47.2% of a single first home buyer's
income to afford a first quartile priced house nationally,
up from from 47.1% a month earlier. The most affordable
city in New Zealand for first home buyers was Wanganui,
where it took 24.2% of a young person's disposable income to
afford a first quartile home. The least affordable was the
North Shore of Auckland at 100.7%.

Any level over 40% is
considered unaffordable, whereas any level closer to 30% has
coincided with increased buyer demand in the past.

For
working households, the situation is similar, although
bringing two incomes to the job of paying for a mortgage
makes life considerably easier. A household with two incomes
would typically have had to use 37.9% of their after tax pay
in September to service the mortgage on a median priced
house. This is up from 36.9% in August.

On this basis,
most smaller New Zealand cities have a household
affordability index below 40% for couples in the 30-34 age
group. This household is assumed to have one 5 year old
child.

For households in the 25-29 age group (which are
assumed to have no children), affordability nationally
worsened to 23.3% of after tax income in households with two
incomes required to service the debt, up from 23.2% the
previous month.

Any level over 30% is considered
unaffordable in the longer term for such a household, while
any level closer to 20% is seen as attractive and coinciding
with strong demand.

First home buyer household
affordability is measured by calculating the proportion of
after tax pay needed by two young median income earners to
service an 80% home loan on a first quartile priced
house.

Question and Answers about
the report

How does interest.co.nz work
out these numbers?

Interest.co.nz gathers data
from Statistics New Zealand and IRD on wages in each region,
data from the Real Estate Institute from each region each
month, and data from banks and non-banks on interest rates.
It has calculated home loan affordability going back to the
beginning of 2002.

How is this survey different
from the Massey University survey of
affordability?

The Massey study is only done
quarterly rather than monthly and uses an index of Home
affordability rather than actually measuring home loan
affordability. It uses an index rather than the actual
measure of the proportion of after tax pay needed to service
an 80% mortgage on a median home. The exact composition and
meaning of the index is not detailed.

Why use a
single median income rather than household
income?

It’s true that most homebuyers are
using a combination of one or more full or part time incomes
to service their mortgage. Each household is different and
may be using incomes from different sources. The best
measure of average national household income is calculated
officially once in every three years by Statistics New
Zealand. Interest.co.nz chose to use the median income data
series from IRD and Statistics NZ because it can be measured
monthly and can be drilled down by region and by age. We do
include a chart showing how many median incomes are required
to keep mortgage payments at 40% of take home pay. It is
currently around 2 median incomes.

Why is home
loan affordability important?

It is a useful way
to work out if a housing market is overvalued. It’s clear
house prices stopped rising when the national affordability
ratio rose above 80% or 2 median incomes to service the
average home loan. It’s a way of comparing affordability
of housing markets with a national average and comparing
housing values from one year to the next. For example, the
affordability ratio in 2002 before the housing boom really
took off was around 41%.

About
Roost

Roost is the sponsor of this Report, and
the Reports must be referred to as the Roost home
loan affordability reports. Roost, owned by AMP, is
one of New Zealand’s largest independent home loan and
investment property mortgage brokers with 16 franchisees
nationwide. Roost offers to source the perfect loan for its
customers from a panel of lenders and insurance advice from
Roost insurance specialists. Roost was established in 1996.
For more information please visit www.roost.co.nz

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